Wednesday, May 14, 2008

Opportunities from the Credit Crisis? And:

Two from FT Alphaville:The FT’s “The Short View” columnist John Authers is blogging for FT Alphaville from Vancouver at the annual gathering of the CFA Institute

A presentation entitled: “The Credit/Liquidity Crisis of 2007: Opportunities for US Bond Investors” sounds as though it would leave you with grounds for optimism. Not quite.

Instead, Michael Lustig, a managing director at BlackRock, made it clear that he is extremely pessimistic. The heading for one slide – “Things Are Terrible – And There’s No Sign of a Bottom” – adequately catches the spirit. .

Echoing the Fed’s Janet Yellen earlier in the day, he said he believes the outright falls in US house prices are significant, and make this crisis different from its predecessors. As he said, Americans’ percentage of equity in their homes has fallen below 50 per cent for the first time on record since 1945. This means there is a real danger of negative equity. This time, he fears, is different....MORE

Prediction markets are not perfectly efficient – but just as democracy is the worst way to choose a government apart from all the others, they are a better way to aggregate information than any other.

That, at any rate, was what Justin Wolfers of the University of Pennsylvania’s Wharton School tried to get across in a presentation that held the attention of CFAs. His strongest claim was that in politics, the only information anyone needs is that provided by prediction markets, as they have effectively aggregated all the information available.

Wolfers’ bullet points go as follows:

Prediction markets in sport get the results right – almost spookily so. In the 3,791 NFL football games played from 1984 to 2000, regression results showed that the spread in the spread betting line could explain 99.7 per cent of the winning margin. Over a big enough sample, in other words, spread betters’ collective judgment was virtually flawless. Moving to basketball, the spread available in Las Vegas spread explained 97.3 per cent of winning margins, in a sample of more than 9,000 games from 1994 to 2001.

They also work well for the Hollywood Stock Exchange: a market predicting movies’ opening weekend box office take is almost as uncannily accurate as the sports betters.

Economic prediction markets work better than consensus forecasts of economists. During the brief history of an economic prediction market run by Goldman Sachs and Deutsche Bank, the market came closer to predicting ISM business confidence surveys, initial unemployment claims, non-farm payrolls and retail sales than economic forecasters did....MORE